A Network Blockbuster

By John S. DeMott

Jonah swallowed more than the whale last week. He also gulped down Dynasty, Hotel, Good Morning America, Monday Night Football, the 1988 Winter Olympics and Ted Koppel. It was as simple as, well, ABC. In the first purchase ever of a major television network, small and scrappy Capital Cities Communications (1984 revenues: less than $1 billion) of New York City agreed to buy the American Broadcasting Cos., which is almost four times its size. The price, $3.5 billion for ABC's 29.1 million common shares, made the acquisition the largest outside the oil industry in American corporate history. The razzle-dazzle play that captured the third-rated network (after NBC and CBS) stunned television executives like an assault from the A Team. Reverberations rumbled from Washington regulatory agencies to Wall Street investment banks. Though the buy-out was a friendly one involving two members of the broadcasting fraternity, the clubby world of the networks suddenly seemed less sacrosanct.

On the New York Stock Exchange, abuzz for the past few years with big consolidations in oil, steel and transportation, the reaction was swift and positive. Investors sensed that a new rush was developing toward stocks of communications companies, portending more big mergers and fast price rises. ABC stock shot up $31, to nearly $106, and issues of some other companies in the field also climbed sharply. At week's end CBS had gained 20 1/4, to 108 3/ 4, and RCA, parent of NBC, had risen 4 7/8, to 42 7/8. Newspaper publishers Gannett and Knight-Ridder were up too, as was the stock of Chicago's Tribune Co. Australian Publisher Rupert Murdoch, whose properties include the New York Post and New York magazine, added even more zest to the media merger mania: he offered $250 million for half the shares of 20th Century-Fox Film Corp. (see SHOW BUSINESS).

At the time of last week's announcement, ABC was not the object of a takeover attempt by anyone outside the broadcasting field, but at least one other network was under siege. Republican Senator Jesse Helms of North Carolina has helped launch an effort by Fairness in Media, a conservative group, to buy up CBS and, as he put it, "become Dan Rather's boss." The Washington Post reported last week that Atlanta's Ted Turner, the cable-TV entrepreneur, told CBS lawyers that he had had extensive discussions with Helms about taking over CBS.

In New York, Financier Ivan Boesky was rumored last week to have bought 7% to 8% of CBS for $240 million. The purchase did not mean that Boesky was gunning for the network, but it did put him in a good position to profit handsomely from any CBS takeover attempt. In Miami, the management of Storer Communications, owner of seven TV stations in cities such as Atlanta, Boston and Cleveland, was fighting off an effort by dissident shareholders to dismember the company and sell its parts.

Some Wall Streeters think that anxiety over the possibility of a hostile takeover drove ABC into a union with Capital Cities. Leonard Goldenson, 79, ABC's builder and chairman, and Executive Vice President Frederick Pierce, 52, denied that fear was their main motivation for joining Capital Cities. But they did stress that the friendly deal would allow both organizations to continue the "independence that has permitted each to flourish and to provide the finest possible service to the public." Said Goldenson: "I felt the mix was absolutely perfect."

So it might be. To ABC's broadcast stations, cable-TV enterprises and publishing ventures would be added Capital Cities' garden of newspapers and specialty magazines, as well as its radio and television outlets. Said Goldenson: "When you put the two together, I felt that two plus two made five."

The two companies began sidling toward each other in 1982, at Capital Cities' annual management meeting. When the session was over, Pierce, a guest speaker, approached Capital Cities Chairman Thomas Murphy and said, "You know, Murph, if things ever change where they allow more stations at one company, it might be a good idea for Capital Cities and ABC to talk."

At the time, the Federal Communications Commission had its restrictive 7-7-7 rule, under which no single organization could own more than seven TV stations, seven AM radio stations and seven FM stations. As of next week, the rule will be liberalized to 12-12-12, opening the way for bigger broadcast mergers. Capital Cities owns seven TV stations and ABC five, so they can get together without exceeding the new FCC limit.

It was when the Reagan Administration was on the verge of changing the rule that Capital Cities and ABC began getting serious about each other. In late January, Murphy paid a visit to Goldenson, who is an old friend. This time it was Murphy who suggested a marriage of the two companies. But as he recalled last week, "I had no idea how to put it together." Goldenson's response: "I'd like to think about it."

Finally, in February, Goldenson and Murphy met in the offices of ABC's lawyer Joseph Flom, a partner in the New York City law firm Skadden, Arps, Slate, Meagher & Flom, famous as takeover specialists. From that point onward, the deal moved rapidly. The two sides spent only ten days in face-to-face talks, although they confronted some sticky points. Says Goldenson: "It fell apart from time to time as we went along."

One of the snags: Where was Capital Cities going to get the money to buy the network? To help solve that problem, Murphy called in a longtime friend, Warren Buffett, 54, a soft-spoken and secretive investor from Omaha. Buffett, who owns 41% of Berkshire Hathaway, a diversified investment firm, is an old hand at deals involving communications companies, but he acknowledges his friend's expertise too. As he told TIME last week, "Murph needs an adviser like Carl Lewis needs a tail wind." Berkshire Hathaway currently owns 13% of < the Washington Post Co., 8% of Affiliated Publications, whose flagship property is the Boston Globe, and 4% of Time Inc. Buffett agreed to buy 3 million shares, or 18%, of Capital Cities/ABC, as the new company is likely to be called. His cost: $517 million. He will sit on the board of the merged company, he said, but "won't be involved in the operations." To get the rest of ABC's purchase price, Capital Cities will sell some of its properties and borrow from banks.

Last Sunday, over a late dinner at New York City's Plaza hotel, Pierce and Goldenson briefed ABC's division presidents about the impending merger. The next morning, the word went out to two dozen other top management people, and finally the deal was revealed. Up until the formal announcement, Murphy and Goldenson had insisted that the proposed merger be kept a secret in order to prevent premature speculation in ABC's stock. Said Goldenson: "We were fortunate that there were no leaks."

What comes next is a long sculpting process to make the new company fit FCC regulations governing concentration and numbers of stations. It is certain that properties worth hundreds of millions of dollars will have to be sold off. The possible complexities are numbing. Because Buffett will be a major shareholder in Capital Cities/ ABC, his ownership of a chunk of the Washington Post Co. could result in the new company's having to sell two Washington radio stations. An FCC rule prohibits common ownership of a radio or TV station and a newspaper in the same city. Capital Cities has already decided to sell its ABC-affiliated station in Buffalo, WKBW-TV, to avoid another cross-ownership problem with Buffett, who owns the Buffalo News. Expected price: as much as $70 million.

In Washington, Justice Department officials foresaw no antitrust barriers, as long as both companies complied with FCC regulations regarding mergers. Some potentially problematic FCC rules might be relaxed by Reagan Administration appointees, who have already let several other large mergers go through unchallenged. Industry lawyers, for example, think that the commission might do away with a regulation that bans a network from owning cable-TV systems, a large part of Capital Cities' business. Joseph Fuchs, a Kidder Peabody vice president and one of Wall Street's top media analysts, thinks that the FCC now sees itself as "neither a sword nor a shield" in the broadcast industry. To speed up Government approval of the merger, Murphy and Goldenson paid visits to the FCC's five commissioners last week. Both men emerged smiling. Said Murphy: "We'll have to do whatever is appropriate to satisfy the FCC."

It seems unlikely that Congress will raise opposition. Colorado Democrat Timothy Wirth, chairman of the House Subcommittee on Telecommunications, Consumer Protection and Finance, said last week that "there appears to be no major public policy obstacle to this takeover."

What Capital Cities is buying is the TV network that, despite its laggard ratings, is America's most consistently profitable. From 1977 to last year, ABC led CBS and NBC in pretax earnings and revenues, a sharp improvement from its early years of being the network everyone joked about (see following story). In 1984 ABC's pretax profits were $428 million vs. $409 million for CBS and $218 million for NBC.

But if everything was going so well economically for ABC, why was it vulnerable to takeover? Answer: the buy-out climaxes years of erosion of the networks' influence in U.S. commercial television. During that time, they have lost viewers to suppliers of cable programs and direct satellite broadcasts and even to producers of videocassettes for home TV tape players. From 1979 to 1984, the networks' audience share dropped from 90% to 78%.

Awareness of this new competition, say Wall Street analysts, helped drive down the prices of the networks' stocks until by last year, they were selling for 40% to 50% below what many experts thought was their true worth. Suddenly the broadcast companies started to look like bargains again, and the feeling spread that any mover and shaker with enough money and backing could stage an unfriendly takeover.

What lies ahead for ABC in its new marriage? Known for its careful cost cutting (see box), Capital Cities will doubtless attempt to trim fat from ABC. It will look with disdain, for example, on the network's habit of sending several executives, when one would be sufficient, on expensive business trips. Money-losing departments like network news might be vulnerable, although Capital Cities generally leaves high-quality journalistic operations alone. Still, as one concerned ABC middle manager fretted, "A lot of people are walking around worried." A producer for ABC News's 20/20 program said, "Capital Cities has a reputation for being a very lean company. They have no corporate legal department, they have no personnel department--none of the accoutrements of a big corporation." Capital Cities may take a knife to the $750 million that ABC executives fancied spending on the Summer Olympics in Seoul in 1988. That is more than twice what ABC has agreed to pay to cover the Calgary Winter Games that year.

The network under its new owner will probably be trimmer and tougher. It will be watched by everyone in the industry, just as it was during its dazzling 1970s rise. ABC may still have a thing or two to teach its broadcast brothers.

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With reporting by Barry Kalb/New York and John E. Yang/Washington